The invasion of Ukraine, Brexit, the Arab Spring, Donald Trump’s “caged kids” and other chaotic events over the past decade have sprung from a “deceptively simple” source: prices, according to sociologist and documentary filmmaker Rupert Russell. .
In 2000, President Bill Clinton deregulated commodity markets under the Commodity Futures Modernization Act, allowing much greater speculation on Wall Street on the price of such staples as oil, wheat, , metals and coffee. In subsequent years, the influx of investment turned commodity markets into “casinos” that produced wild price spikes and independent crashes of physical supply and demand, according to Russell.
For his 2022 book price warsRussell has traveled the world to visit regions affected by price fluctuations and draws clear lines between his gonzo account of the chaos he witnessed, commodity market prices and the deregulation of markets.
We talk to Russell about how financial speculators have sown a new era of chaos.
In the book you talk about the butterfly effect, the idea that seemingly trivial and localized events can have much larger consequences. One example was the 2010 Russian forest fires, which speculators thought would cause a wheat shortage (it didn’t). How did that help start a revolution in Tunisia, the Arab countries? spring, the war in Ukraine and other chaos throughout the last decade?
The Arab spring of 2010 was triggered by a spike in food prices essentially driven by a rally in wheat futures. What’s interesting about the price spikes of 2010, and the one before it, in 2008, which triggered a global food crisis and riots in 48 countries, is that they were both events where small real-world shocks ended up producing huge price spikes, which turned these local grievances into revolutions and civil wars.
Although we call what happened in 2008 and 2010 “food crises”, they occurred in years that produced more food than any previous one. These were actually years of plenty, so the “food crises” were actually price crises that were largely just commodity market creations.
So chaos starts in the financial markets and turns local disturbances into global events with rising commodity prices, because commodity prices have incredible power to disrupt society.
Why do we suddenly have these food riots, bread riots, runaway inflation, cost of living crises, refugee crises? Where does all this come from? It wasn’t there in the ’80s and ’90s, and my book argues that there was this change in 2000 that essentially put an amplification engine in the commodity market.”
How have these food price crises affected throughout the decade?
It was very clear that Brexit was largely driven by the global refugee crisis, caused by the civil wars in Libya, Syria and Yemen, all of which had their origin in the Arab Spring.
These civil wars not only created refugee crises they created a [rightwing] rise of populism in Europe, they also created chaos that is fed back into the market. Chaos in the market creates chaos in the real world which creates more chaos in the market. There is a feedback loop.
Almost by definition, when you have a war, you see spikes in oil prices. So what happens when oil prices are high? [Venezuela’s former president Hugo] Chavez borrows tons of money just before his election campaign and embarks on a huge spending spree, doling out televisions, washing machines, etc. Putin accumulates his war chest and modernizes his army. And a ton of this oil money is recycled into Western assets, particularly real estate in San Francisco, London, New York, and that creates a crisis.
What’s so fascinating is how, say with Russian wheat crop fears, speculators are often wrong about what’s going on in the real world, but it doesn’t matter. Speculators who are the first to correctly bet on price movement are paid even if prices are separated from bid and ask, while the public often pays higher prices.
It is not important that the speculators are right, and that is the paradoxical way we set up these markets.
isis is another good example of this. You detail how oil prices skyrocketed in 2014 when the group took Mosul. but isis, a Sunni group, had invaded a Sunni town that was not near an oil field. the shiitesThe Kurds and the Kurds controlled the oil fields, defended them, and as you note, there was never the physical scarcity of oil that the rising prices suggested.
These narratives automatically assume that when there is a war in the oil states, supply will go down and prices should go up, but there is no rational or historical reason to think that will be the case.
Except for the physical destruction of infrastructure, nothing stops the movement of oil barrels. Even if ISIS seizes the oil fields in Syria or Iraq, they pump the oil, sell it through Turkey and it goes back to the global market; that is the reason why an oil field is taken.
In March 2003, Bush’s invasion of Iraq occurred and oil prices fell. This was before speculators took over the market and it was dominated by traders much more entrenched in the boring world of buying and selling barrels of oil who knew that Bush’s number one priority was pumping oil.
And those high oil prices destabilize even more. You cite research from the University of Denver that found a strong correlation between the amount of conflict globally and higher oil prices. After the 2008 oil price spike, Russia invaded Georgia. After speculation-driven oil spikes in 2014 and 2021, Russia invaded Ukraine.
We see this all the time, not just in Russia. In 2008, when oil prices were high, we had the so-called Pink Tide in South America with Venezuela intimidating its neighbor Colombia, or Iranian proxies launching rockets at Israel. It’s really the empowerment of petrostate regimes to do things they always wanted to do but didn’t have the means to do.
One wacky example he sees that highlights the role algorithms play in unhinging prices from reality is Anne Hathaway’s connection to the value of Berkshire Hathaway stock. Bad news for the actor translates into bad news for the company just because they share a name!
The speculators I spoke to said that if you really want to understand how the markets work, you have to understand how Berkshire Hathaway correlates with Anne Hathaway’s film career.
Every time an Anne Hathaway movie comes out, Berkshire’s Hathaway stock skyrockets. And when bad things happen to Anne Hathaway, like when she was in a car accident, Berkshire Hathaway stock goes down.
What they are saying is that they have algorithms that read the headlines (think Reuters, Bloomberg stories) that are fed into the computer and can detect if it is a negative or positive story and trade accordingly.
You argue that hedge fund bets on the coffee market eventually led to Trump’s “kids in cages” policy where over 1,000 children of undocumented immigrants were separated from their parents at the US border. Can you unpack that a little bit?
In Guatemala in 2018-2019 there were two different clashes that came together. Central America has long been seen as one of the regions most vulnerable to climate change and I interviewed coffee farmers who spoke about how changes in rainfall patterns, humidity and temperature promoted the growth of a fungus called “roya” , and they had to spend more money on fertilizers to combat this pest.
To pay for the fertilizer, they borrowed money from local lenders at exorbitant interest rates. So they go into debt, they harvest their crop, they go to the market to sell it, but by 2018-2019 world coffee prices had severely declined to the point where they were making losses.
What caused the drop in coffee prices?
There were stories of growing production in Brazil and of new countries producing a global glut of coffee. Many commodity traders have historical short positions in the coffee market [bets that the price will fall] …and all these markets, especially coffee, are small. A single pension fund could be bigger than the entire coffee market. So yes, there was an increase in the supply of coffee globally, but the drop in coffee prices was driven by this lopsided bet that hedge funds made that crushed the markets.
Then you have hundreds of thousands of farmers and communities that depend on their income lose money on that crop that they’re essentially bankrupt, so they lose everything: their house, their land. He ended up sending them where they have gone for decades in times of crisis: the United States. We saw commodity markets as an amplification engine, amplifying a local climate shock into an international global event, which was the US border crisis.
We don’t hear much in 2019 connecting Wall Street with children in cages. Why do most reports miss root causes?
Monsters are the best story and that’s what consumers report, share and enjoy. We predetermine monster stories and that’s what I’m trying to oppose.
Trump is a monster and putting children in cages is a monstrous thing, but that ends up becoming the debate and you have to remember that the origin of all this chaos is elsewhere.